Tough winter makes economic assessment hard: Fed's Plosser

Daniel Bases

4 Min Read

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid

NEWARK, Delaware (Reuters) - Assessing the U.S. economy’s underlying economic trends has become more difficult because of record low temperatures and heavy snowfall across much of the nation, Federal Reserve Bank of Philadelphia President Charles Plosser said on Tuesday.

“I suspect it may be another couple of months before we have a better read on the economy,” Plosser said in a speech at the University of Delaware. He characterized the weather as “unusually disruptive.”

On Friday the January U.S. jobs report showed a smaller-than-expected increase of 113,000 in the number of newly created non-farm jobs versus the Reuters consensus estimate of 185,000. The unemployment rate dipped to 6.6 percent, a five-year low..

Plosser, in comments to reporters, said the data was now “noisier than usual,” and therefore would take the latest round of economic data with “a grain of salt until we get some more information and presumably get a better read.”

Plosser, a voting member of the U.S. central bank’s monetary policy committee this year, reiterated his stance that the Fed should move faster in winding down its bond purchasing program. He called the purchases, known as quantitative easing, “neither helpful nor essential.”

He expressed some surprise that inflation has remained well below the Fed’s stated 2 percent target given all of the quantitative easing, but so far he’s not overly concerned.

“We have done over $1 trillion of QE since a year-ago September and inflation rates have come down. If you are worried about inflation being too low it is not at all obvious the right answer is more QE,” he said.

Plosser reiterated that even with January’s disappointing jobs report there has been significant improvement in labor market conditions, to the point where the criteria for ending asset purchases has been met.

Beyond the asset purchases, the Fed has promised to keep interest rates near zero until well past the time unemployment falls below a 6.5 percent threshold, especially if inflation remains low.

The central bank is now buying $65 billion per month in Treasuries and mortgage bonds to depress borrowing costs in the U.S. economy, which was slow to recover from the 2007-2009 recession but strengthened toward the end of last year.

Plosser reiterated he expects economic growth of 3 percent in 2014 and the unemployment rate to steadily decline to 6.2 percent by the end of the year.

RATES RISE TOO SLOW

History is not on the side of the central bank when it comes to raising interest rates in a timely manner and the risk is financial markets will force its hand, Plosser warned.

He pointed out that historically it is always easier to lower interest rates to spur economic activity than to raise interest rates, a mechanism to slow the pace of inflation.

“It is the nature of the beast,” he said, adding that he is concerned the Fed will once again be too late and resist raising until they are behind investors.

“Financial markets aren’t always patient and they could decide it is time to raise rates and long-term rates start rising and interest rates start going up and we are going to be forced to chase them up. Then we will be behind. I don’t want to chase the market, but we may end up having to do that,” he told reporters.

“We may be late but the consequences may be more consequential now than in other times,” he said.

Plosser reiterated the Fed has a problem communicating what it will do when economic data meets thresholds such as 2 percent for inflation and 6.5 percent for the unemployment rate.

Inflation came in at 1.l percent last year and is likely to move higher toward the Fed’s target, Plosser said. On Friday, the Labor Department’s jobs report showed the unemployment rate fell to a five-year low of 6.6 percent.

“We never said what we are going to do after that point,” Plosser said, referring to the employment data and economic data in general.